Investors swing between greed and fear, between euphoria and depression, whether about the stock market as a whole or individual parts of it.

Right now oil prices have pulled back from their highs, and oil bears are crowing on Twitter, “I was right!” I’ve seen some oil bulls admit they were wrong despite the fact that no one knows if this is a short- or medium- or long-term pullback.

I find myself swinging between euphoria and fear at the wrong times. Silver went parabolic? I’m in! Now the oil price is down? Sell all my energy holdings!

Greed and fear across the market(s)

In a memo to clients dated April 11, 1991, Oaktree Capital Management investor Howard Marks wrote:

The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward the extreme itself that supplies the energy for the swing back.

Investment markets make the same pendulum-like swing:

• between euphoria and depression,
• between celebrating positive developments and obsessing over negatives, and thus
• between overpriced and underpriced.

This oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at the “happy medium.” (Emphasis added)

Right now, we see depression in the oil market, as algorithms and people respond to Trump’s announced deal with Iran. And we see euphoria in semiconductor stocks, as those same algorithms and people judge that the price of Micron, AMD, Intel, Sandisk, and others is going to keep climbing for the indefinite future.

In his book Irrational Exuberance, Yale professor Robert J. Shiller states:

Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others’ successes and partly through a gamblers’ excitement.

These swings tend to go further and last longer than people expect but in financial history, every such swing to depression or exuberance has ended with a return towards the midpoint, and then a continuation to the other side. Of course with a specific stock, this may not be the case. Certain stocks never see swings of irrationality because they are too stable. And certain stocks go to zero, for example if the company goes out of business.

I’m talking about markets: the U.S. large cap market defined by the S&P 500 index, the crude oil market defined by futures in the Brent and WTI benchmarks, particular sectors of the market, such as semiconductor stocks.

What to do about greed and fear?

In short: come up with a system where you don’t have discretion to choose what to buy and what to sell, and when. Some investors use buy-and-hold investing for this: pick an allocation, perhaps across a set of passive index ETFs, and then rebalance to that allocation every quarter, or every year.

That didn’t work for me because I want to make decisions! But I’ve learned that the decisions I should make are about what my trading rules are, what kinds of trades I do (e.g., short puts, long calls? swing trades?), when to enter, and when to exit. Oh and of course: which tickers to trade. Don’t forget position sizing rules, diversification requirements, and exactly how much risk to take on across the portfolio.

I’ve done this with my options wheel trading and it worked really well, but I need to expand upon what I’m doing. I’m implementing a hedging system because selling cash-secured puts has unlimited downside risk that I don’t want to take on. I’m making my choice of which tickers to trade a lot more systematic, using a screener I set up in Tradingview and rules about when to sell a put on a particular ticker.

I’ve experimented with long calls and swing trades too, but it might be enough for now just to focus on the short puts plus the long put hedges.

Once I have this system working, I shouldn’t feel greed and fear. Instead, I will just know that sometimes my trades will pay off and sometimes they’ll get stopped out. Sometimes, similarly, my hedges will pay off but much of the time they will expire worthless.

This is a probabilistic way of thinking about trading. I don’t know what’s going to happen, but I can make guesses about it and give myself a probabilistic edge that should help me see good realized results.

Greed and fear begone!

I’ve realized that to improve my trading results, I need to address my psychology, not learn more about options or about certain corners of the markets or start trading futures.

Mark Douglas’ book Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude addresses exactlly what I need to fix: my thinking.

An interesting point he makes early in the book is that one dysfunctional pattern he sees over and over again in unsuccessful traders is the attempt to avoid losses by learning more and more about the market.

Instead of learning more about the market, he suggests, you need to fully accept the risk you are taking on, and the possibility of losses:

[It] would stand to reason that the best way to avoid losses and become consistent would be to learn more about the markets.

This bit of logic is a trap that almost all traders fall into at some point, and it seems to make perfect sense. But this approach doesn’t work. The market simply offers too many—often conflicting—variables to consider. Furthermore, there are no limits to the market’s behavior. It can do anything at any moment….

This means that no matter how much you learn about the market’s behavior, no matter how brilliant an analyst you become, you will never learn enough to anticipate every possible way that the market can make you wrong or cause you to lose money…. The hard, cold reality of trading is that every trade has an uncertain outcome. Unless you learn to completely accept the possibility of an uncertain outcome, you will try to either consciously or unconsciously to avoid any possibility you define as painful. In the process, you will subject yourself to any number of self-generated, costly errors.

Douglas continues:

You have two choices: You can try to eliminate risk by learning about as many market variables as possible. (I call this the black hole of analysis, because it is the path of ultimate frustration.) Or you can learn how to redefine your trading activities in such a way that you truly accept the risk, and you’re no longer afraid.

How do you truly accept the risk of trading? He says, “you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation.” And this requires thinking probabilistically.

Douglas offers these five fundamental truths for trading:

1. Anything can happen.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.

Douglas believes that, by accepting these as true, you can eliminate your tendency to interpret market information as painful or threatening, and you create a carefree state of mind.

My own evolving trading attitude

I confess for the past few years, since I’ve turned my attention to investing, I thought I could predict what would happen. I thought by reading financial pundits, and studying the macroeconomy, and learning about various markets that I could know what would happen with some certainty.

I’ve learned that I’m wrong. I can outline possibilities. I can develop instincts about what is more likely to happen. But what actually happens? That’s not something I can predict in advance.

My emerging trading approach — which combines the options wheel, swing trading, and a comprehensive, quantitative hedging approach — does not rely on predictions. I use technical analysis (looking at charts of price and volume action) to determine which of many possible tickers to trade. I use diversification across sectors and factors because one never knows what rotation might take place, or what bad news might hit a particular corner of the market.

Changing my thinking

I have noticed that a phenomenon Douglas describes has happened to me. That is, when I expect the market to do one thing, and another thing happens, leading to (as-yet-unrealized) losses, my attention narrows. I start looking for evidence that actually things are going to turn around. My losses will turn into gains. All my attention gets taken up by that big red number flashing on my positions page.

When I think that I can predict where the market will go based on analyzing tweets or news reports or Substack articles, then I start to get tunnel vision, only looking for evidence that confirms what I’m hoping for. It drags my attention away from my portfolio as a whole.

A trading system that honors the reality of the market

A trading system that truly acknowledges and accepts that anything can happen can be constructed by using the following approach:

• Selecting which kinds of trades you are going to enter and exit, on what time frame (day trading, weekly, a month, a couple months, more?)
• Determining which assets of a certain class you are going to consider (only equities? equity options? commodity futures? etc).
• Defining a set of filters for your watchlist — for example, if trading stocks, what company sizes will you consider? What geographies? What industries? What profit metrics? And going further, you can limit yourself to only those equities where their current price is higher than one month ago, three months, and 12 months.
• Defining entry and exit criteria — for example, those with charts that have a bullish major trend only, and that have taken a dip, but bounced off of support?
• Specifying position sizing criteria along with maximum risk you’ll take on per trade
• Specifying diversification criteria — i.e. don’t have all your account in semiconductors!
• Determining exit criteria up front for both profits and losses and possibly using stop loss orders to ensure you automatically get out in the case of losses

Onwards

I wish I had read Douglas’ book before I started trading, but I’m not really sure that it would have made a difference. The reason I went looking for such a book is because I’m having trouble translating knowledge and learning into the realized results I’m hoping for. And it’s because of exactly what he identifies: I haven’t fully accepted that the market can offer up anything — anything can happen — the solution is not to learn more technical skills or trading systems. The solution is to fully embrace the probabilistic nature of market outcomes, with a trading system that gives me an edge, but also allows for and protects against outcomes I didn’t predict.

As a story, as a literary narrative, the more pain for our heroine (me) the better. Books I’ve read about crafting a compelling novel or screenplay suggest that you have to keep turning the screws on the protagonist. It must get worse and worse and worse, before there is peak conflict, and a turning point, and the capturing, by the protagonist, of some reward.

I’m still in that part of the hero’s journey where things get worse and worse.

Last Friday, I held a party at my house after my daughter’s master’s degree graduation ceremony. My daughter’s father (my ex-husband) attended. That doesn’t seem like a big deal, does it? Many divorced parents join together for celebrations involving their children. My parents, divorced for almost three decades, have long attended holiday celebrations involving their joint kids and grandkids together. But this was the first time in the almost fourteen years since our divorce that my ex attended a family event I had at my house.

My emotional reactions to this were surprising to me, and new. I felt happy for my children, but also happy for myself. I was happy for my three children, especially the graduate, that their dad showed up. And for myself: it has been hard to feel shunned for so long.

It made me think about all the emotional tumult I’ve been through in the aftermath of the divorce.

Two kinds of emotional reactions

In her most recent newsletter article, Going from one form to another, Jessica Dore shared a link to Kym Maclaren’s academic article Emotional clichés and authentic passions: A phenomenological revision of a cognitive theory of emotion.

Maclaren distinguishes between emotional clichés — reactions that are well-practiced and not newly created for a particular situation — vs authentic passions — reactions that represent creation of new meaning.

Maclaren bases this distinction between two types of emotional reaction in a conceptual framework from Maurice Merleau-Ponty (1908 – 1961), a French phenomenological philosopher working under the influence of Edmund Husserl and Martin Heideggger.

Maclaren writes:

In his analysis of language and expression, Merleau-Ponty distinguishes between first- and second-order speech, or in other words authentic speech and already constituted, sedimented speech. Second-order speech is speech that relies upon the familiar, already established meanings of words; it expresses thoughts previously constituted by ourselves and others and makes sense of the world in familiar, well-worn ways. This is the realm of clichés or what Heidegger calls “they-speak.” First-order or authentic speech, on the other hand, seeks to articulate a thought not yet constituted, and draws upon the sedimented meanings of words in such a way as to break them, transform them, find new meaning in them and thereby “inaugurate” as Merleau-Ponty says a new dimension of experience, a new way of seeing. This is poetic language, language that gives us “new organs” and reveals within the world dimensions previously unknown.

She continues, applying this idea to emotions:

A similar distinction can be drawn, I contend, between first and second order emotions—between authentic passions and emotional clichés. Emotional clichés are, I propose, emotional responses that draw upon already familiar, established routes for making sense of things, and that reinstitute familiar ways of being. Authentic passions, on the other hand, involve the realization of unforeseen meanings within the world and new ways of becoming oneself.

Maclaren cites grief over the loss of a person central to one’s world as an occasion for the development of new meaning rather than a replaying of already-learned emotional pathways:

In this kind of grief, we can find not reiterations and recapitulations of old, sedimented meanings and ways of seeing, but rather a genuine openness and vulnerability. The bereaved is not simply asking an isolated question; his very life has become a question.

For this question to be answered, for grief to be genuinely transformed and overcome, something creative must occur. The bereaved must become someone new, and live in a transformed world. He must cultivate a new form of life in which he might live meaningfully without either pretending that his beloved is still here, or leaving her entirely behind.

expression drives transformation

The process of developing authentic emotional meaning requires expression, proposes Maclaren. “The experience that exists prior to expression is, then, one in which we are not yet in possession of its meaning,” Maclaren writes. It is expression that brings about transformation:

Expression is liberating because it transforms the very structure of this experience: it involves a circumscribing of what it is we are experiencing, and thereby a gradual distinction of ourselves from the object of our experience. It turns our experience from something that moved and overwhelmed us, that opppressed us by putting us into question, into something that is “for us” or owned.

Grief, like I felt over my divorce, can drive new ways of being, but involves first a breakdown of understanding who one is and what one should do:

Such a passion is not merely a “judgment,” a construal, an endorsement of habitual meanings offered up by a situation. It consists rather in a breakdown of our habitual negotiation of the world. The bereaved experienced a crumbling of his world; and as his world fell apart, so too did his sense of how to live, and who he is. Where there was once breakfast time, for instance, there is now only confusion, indeterminacy, a gaping openness. In grief like this, things within one’s perceptual field no longer clearly call to one to do this or to say that; and as a result, it is no longer clear who one is to be. This is what it means, I propose, to be put fundamentally into question, to live as a question, and thus to experience an existential passion. It is to be a subjectivity or an experiencing in which subject and object are not yet fully realized, in which how things mean and who one is are still in flux; it is to be an experiencing which calls not for a mere endorsement of familiar meanings, but for self-overcoming, for some creative form of expression in which a new grasp on the world is realized—however provisionally—and one newly “becomes oneself” (at least until the next breakdown of meaning).

This describes very well what I experienced after my divorce. While I felt sometimes compelled to accept the meanings and expected emotional reactions that my society offered to me — the meaning that I was flawed and I had failed, the prescribed reaction that I should feel shame (and I did, and still do) — I also felt like there was room for meaning making and for deciding myself what meanings and reactions I would express.

On Friday, my children felt that the attendance of their father was only about them, and in many senses it was. My ex would never attend a social event at my house except for it’s being about one or more of his children. But it was also about me, because the reason he hadn’t attended past such events was because of my presence and the presence of my parents. His willingness to attend might have said something about his moving beyond his own past reactions and meanings. And in that way, it felt like some sort of release. For me.

forced to make new meaning

There is a level of passivity to my creation of new meaning in response to my divorce, which I in some sense chose, but was also thrust onto me.

Maclaren writes:

Once we acknowledge authentic existential passions, I have proposed that we are also called upon to revise our understanding of subjectivity. The subject can no longer be understood as a purely self-determining agent who constitutes the meaningful world; the subject must rather be understood as achieved from out of a dispossession by the world, and in part by being moved by meaningful directions already at work within the world. Though the subject realizes itself, becomes itself, through assuming and further determining these meaningful inclinations operative within the sened world, the subject cannot be understood as wholly active. We must allow a fundamental dimension of passivity within subjectivity. We must allow that we are meaningfully moved by the world that we inhabit.

I must acknowledge also that my ex-husband experienced the grief of the divorce as thrust upon him, and acting upon him, and creating a setting in which he as well had to reconstruct meaning, transforming himself in the process.

Most recently, I have myself begun to take an affirming position relative to the divorce: it happened and I am glad of it — I choose it — because I am glad of the good, bad, and terrible I’ve experienced in this human life. I choose it and would choose it again and again.

Graduation day is behind me, and my retinal surgery is 11 days from now. This week, my focus will be on creating a spreadsheet system or possibly web app to run locally for tracking my trades including my new bucketed put hedging strategy.

I have been tracking trades with a combination of googlefinance calls and entering data such as options deltas manually but (1) that’s prone to errors and (2) it’s a hassle. So going forward I’m going to import positions data that I download from Schwab. Eventually I may use Schwab’s API to automatically grab the information.

I’m looking forward to this project. It’s fun to build software that improves your life and the activities in it, and this will be a vast improvement over what I’m doing.

How to build it

I’ve already experimented with building a couple trading tracker and recommendation systems, one in Google Sheets and one as a local web app. I used Gemini to build the first and Claude for the second (can’t remember which models of either). But now I’m under the impression that Claude is super-expensive for coding? And not sure if I need a premium version of Gemini to do this project?

The web app was easier to use in that it could import files right after I downloaded them right from my Downloads folder. For the Google Sheet, I had to first upload the files to a Google Drive folder, a small extra step. I’m planning to update the tracker each day about an hour after the market has opened so that I can get fresh updates such as for options premiums, deltas, and more.

It’s not a huge deal to take that extra step of uploading the files after downloading, and it’s easier for me to update a spreadsheet than a local web app.

So I’m starting with a Google Sheets based implementation.

I started building it

With Gemini’s help, I started building the spreadsheet.

I have three sheets so far:

• Ledger – generated by importing Schwab positions downloads. Includes a record for each open position and calculates “delta dollar” exposure for each position, negative for a short position and positive for a long. (Note that means short puts generate long delta dollars!)
• Tickers – for each ticker in the Ledger, I associate the ticker with a hedging instrument, either $QQQ for tech and growth, $SPY for broad market beta, $XLE for energy, $GLD for precious metals, and $TLT for fixed income. I don’t have industrial metals and mining assigned to their own bucket, so have put them in with $SPY for now.
• Hedge Manager – sums up long delta dollars per hedging ticker and separately sums up shorts (from long puts or short sales of stocks). Then I compute a ratio of shorts (the hedges) to longs. For each category I have a target hedge percent, mostly 30% but less for fixed income. I calculate how much delta dollars I need to add or subtract to get back to the specified hedge percentage. This means I will sell the hedge when it gets too rich or sell the long if vice versa. Or alternatively, add hedges or add longs, to get back into balance.

I am severely underweight on short energy positions which is killing me, and overweight on $QQQ and $SPY hedges. I will begin adjusting tomorrow but not going to do it all at once. Will slowly work my way towards my desired ratio of short to long positions.

And how will I adjust?

• I can sell out of energy positions though I’m loathe to do so as they are so far depressed right now. They are likely to fall further if a deal is signed this weekend though. I bet they will bounce back up over the summer but how long do I need to wait for that? And meanwhile, I’m trying to be more disciplined about my system.
• I can add more longs to growth and broad market beta. Or adjust the short positions for less hedge exposure.
• I’m also over-hedged on $GLD, so need to dial that back. And have no hedges for fixed income as of yet. So may do something there.

The free version of Gemini has worked great for this. It makes a lot of mistakes but I think I caught them all as we moved step-by-step forward.

And other things to do

I have a few other things to do this week –

• Get an x-ray of my shoulder and lab work before I may have a steroid injection. May have “frozen shoulder.”
• Take my daughters to the airport for their Hawaii trip.
• Lunch with a friend on Thursday.
• Schedule movers to grab some furniture from my mom that she’s giving to me.
• Schedule my dog with the vet for his annual exam.
• Keep reading Anna Karenina and watching the miniseries to go with it.
• Keep up with home and garden maintenance

All I really want to do is work on my trading system, but must balance that out with attention to other aspects of life.

Last year I planted hollyhock seeds that a neighbor gave me, and this year they are starting to bloom.

Hollyhocks are biennials; they complete their life cycles in two years. In the first year, they produce a cluster of large leaves. In the second, you’ll see tall stalks of flowers. Then they’ll produce seeds that drop and start anew.

This means if you want blooms every year you need to sow seeds yourself two years in a row.

I told my mom about my hollyhocks, and she said, “Oh I always thought of them as weeds, because they grew in the alleys when I was a child.” She also told me that theyused to make hollyhock dolls, which I looked up on YouTube:

Weeds they may be, but I am thrilled to have such impressive statement plants at the back of my front flower bed, and for free too!

I’m naturally frugal, and growing plants from seeds, especially seeds that were gifted, really thrills me.

Sometimes I think I would have liked to live as a frontierswoman on the prairie, like Laura Ingalls and her mother and father. They couldn’t immediately turn to Amazon when they wanted or needed something. When she were little, Laura didn’t even get a real doll. From Little House in the Big Woods, the first book in the Little House on the Prairie series:

Mary was bigger than Laura, and she had a rag doll named Nettie. Laura had only a corncob wrapped in a handkerchief, but it was a good doll. It was named Susan. It wasn’t Susan’s fault that she was only a corncob. Sometimes Mary let Laura hold Nettie, but she did it only when Susan couldn’t see.

The hollyhock dolls made me think of Susan the corncob doll, and how sometimes making do is more fun than buying something new. Though I imagine Laura Ingalls would have preferred a real doll to her corncob.

Frugality in practice

I held a graduation party at my house yesterday after my youngest child’s graduation with her master’s degree. I bought 1.5 liter bottles of wine for it because they were so cheap I couldn’t stop myself. It would have been more tasteful to buy regular-sized bottles of wine. But the wine in the big bottles tastes pretty much like the wine in the smaller bottles, at least at the price points I shop.

My dad’s girlfriend said, “those bottles remind me of when I was in grad school!” Perhaps it was appropriate as my daughter was completing a graduate degree.

Frugality sometimes gives you better results than not being cheap. Every morning I run around the house and open all the windows then turn on my attic fan, as long as the temperature in the house is higher than the temperature outside. Cooling the house with fresh air makes for a much more pleasant climate than using air conditioning round the clock. I’m glad the former owner of my house had the foresight to put in that attic fan.

I like to shop at Goodwill for some items of clothing, for housewares, and for towels. I found my favorite two hoodies at Goodwill for under ten dollars a piece. They happen to each be Columbia brand, and of a style and size that really suits me I think. I couldn’t have done better with new items. Yes, a lot of stuff at Goodwill is haggard and crappy, but you can find good deals, and what a rush when you succeed.

From free hollyhocks to the dolls they can make to cheap Columbia hoodies, frugality is fun!

You might be surprised to learn, as I was, that you can improve your portfolio’s realized returns by adding a hedge that reduces portfolio variance, even if that hedge has negative expected returns on its own!

This feels counterintuitive. I’ve always thought that a hedge with negative expected returns would reduce overall portfolio returns. But what a hedge can do, if constructed right, is smooth returns so that, when your “main” portfolio components (the ones with positive expected returns) falter, your hedge steps in and keeps losses from hurting you so much. Then you have less distance to cover to start making positive returns from the main portfolio components.

I learned about this in The Case for Shorting by Greg Obenshain of Verdad Research. He writes about why this works:

The explanation is mechanical. Over any period, the realized (compounded) return of a strategy is approximately:

This relationship, used by Kelly, Shannon, and Thorp, captures the effect of volatility drag: the gap between the arithmetic average return and the geometric (compounded) return. Average return is what we optimize ex ante. In any given period, the expected return of a portfolio is just the weighted average of the expected returns of its components. Variance determines how much of that return we keep. Higher volatility reduces the fraction of the average return that compounds.

And:

Reducing volatility directly increases realized returns, even if average returns are unchanged. A short that lowers portfolio variance can improve compounded returns, even if it has negative expected returns on its own. Conversely, a short that adds variance will reduce compounded returns, regardless of its correlation. Below we show the volatility drag at various portfolio standard deviations to show how much return is available from volatility reduction.

Applying this to my short put portfolio

I knew theoretically that holding a bunch of short puts, in expectation of keeping the credits when they expired worthless, posed big risk during a market downturn. I’ve seen that play out over the past couple weeks as many of my positions came under significant pressure, as semiconductor, other tech, energy, and precious metals all took a downturn.

I started to play around with short stock positions and long puts, but didn’t have a way to think about how to do this. Would I only enter long puts when the market and charts looked weak? It wouldn’t make sense to do it all the time it would seem, because then I’d just be bleeding money from premiums.

But this idea of reducing variance suggests that actually holding long puts as hedges at all times would improve my realized portfolio returns, even though that part of the portfolio would have negative expected returns (out-of-the-money puts generally expire worthless, especially if you don’t spend much money on them).

My plan going forward is to hedge my long positions with correlated long puts, for example long puts on $QQQ (for growth stocks), or $XLE for energy stocks, or $GLD for precious metals. I will plan to hold this “insurance” at all times, because it’s impossible to predict when the market may fall, and because puts become much more expensive once it does.

My not-so-trusty AI companions¹ have offered a couple suggested rules for determining how much put insurance to buy:

• Gemini suggested using 15% of collected premium
• Claude suggested calculating total delta of the portfolio (or the segment I’m trying to protect) and purchasing a percentage delta in puts — enough to offset 20 to 50% of that delta.

As an example of the second approach: if a short put has a delta of -0.30 and I’ve purchased five contracts, that gives me a total delta exposure of -150. I would then buy enough long puts to get me to say 45 delta total.

A missing piece of my plan

This gives me a way to continue pursuing the options wheel without leaving myself open to disaster in case of a market pullback. As to how it will actually work in practice, I guess ideally I’d run some sort of backtest. That sounds like too much work, so I’m just going to move forward with a basic plan and see how it does. Of course this is the sort of thing that plays out over years.

Part of what makes any investing plan work is if it gives me the psychological confidence to stick with it. This will help me stick with options trading better than I could before, and will as well benefit my discussions with my asset manager who manages my retirement account. I’m seeing his recommendations to include noncorrelated assets in the portfolio in a whole different light now.

1. I no longer pay for any of the higher end models for Gemini, Claude, and ChatGPT. And even when I did, all three of them were likely to say patently wrong things about options trading. I know what I’m doing so I can call them out on it, but I am careful with anything they suggest. ︎

The market mostly shrugged off this week’s CPI report showing an increase to 4.2% from 3.8% in April. While broad market indexes have been weak, market-based inflation predictions continue to fall, suggesting sentiment that the price shock from the Iran war is temporary.

In this morning’s Bloomberg Points of Return newsletter, John Authers and Richard Abbey write that the market may be a bit too complacent. Breaking down the CPI into components shows that the rise in the CPI isn’t just due to increases in energy costs.

The rise in the energy component is obviously important, but services remain obdurately high, while food inflation — politically salient these days — hasn’t gone away. These numbers rule out a rate cut.  

More to the point, alternative measures of core inflation signal that pressure is rising. The Fed’s favored “supercore” of services excluding housing is rising sharply, while the Atlanta Fed’s gauge of sticky price inflation, covering products whose prices take time to change and are difficult to cut, has risen above 3%. Both the trimmed mean, excluding outliers in either direction such as oil and averaging the rest, and the median also rose and are higher than CPI excluding food and fuel.

Gianluco Benigno, professor of economics at the HEC-University of Lausanne, suggests that the real danger here lies in supply chain disruption:

the bigger risk from the current Middle East shock is not a one-off price spike. It is persistent inflation, the kind that takes years to unwind, not months. And the reason for that distinction is not about the level of oil prices. It is about whether the disruption is large enough, broad enough, and durable enough to activate a very specific and underappreciated mechanism: the nonlinear propagation of supply chain stress through the entire production system.

Is the market in denial?

Right now, the market seems to think that (1) any energy supply shock will be short-lived and will resolve quickly once the war concludes and (2) the Fed funds rate will follow the oil price. You can conclude this by looking at implied Fed funds rates, which rise and fall with oil price futures changes and ceasefire headlines.

Benigno writes:

Oil futures are necessary but not sufficient. They tell us something about the direct energy-price impulse. They tell us much less about the cumulative production-network cost of disrupted logistics, rerouted cargoes, LNG shortages, and delayed inputs. And they embed the assumption that once the geopolitical dust clears, the inflation consequence clears with it.

Benigno’s research suggests that with “normal-sized” supply chain shocks, PPI spikes then fades, leading to a rise in CPI with a modest rise in core, and then a medium-run normalization.

But in a large shock (defined as the top historical decile of GSCPI, the global supply chain pressure index), core does not normalize over the medium-term policy horizon. Core inflation purports to measure the underlying long-run trend of aggregate price levels in the economy, removing items with short-term significant price fluctuations such as food and energy. Benigno points to a nonlinear response: with a large shock you get a disproportionate rise in core CPI, which is a persistent form of inflation.

Why is there this nonlinearity?

Supply chains have buffers that allow them to manage small- to medium-size shocks: they store inventory that they can use up before buying more inputs, they have some pricing flexibility, they can negotiate with suppliers. This helps absorb the shock and can prevent it from propagating through the chain.

But, Benigno suggests, these buffers can’t accommodate severe disruptions:

The cascade compounds: each stage passes through a higher fraction of its cost increase, and the cumulative pass-through amplifies. A Hormuz closure does not just raise oil prices. It has stranded LNG, disrupted petrochemicals and fertilizers, and raised maritime logistics costs at every stage simultaneously.

And there is a second, conditional mechanism that may occur:

When disruptions are severe and sustained enough, they stop being perceived as transitory. Workers facing real income losses demand wage compensation. Firms, observing that competitors are also raising prices and facing persistently higher input costs, incorporate cost expectations into new price-setting rather than absorbing them. Inflation expectations drift upward.

This channel depends on the state of the labor market and how salient inflation already is to firms and workers at the time of the shock. A tight labor market in which workers have already experienced one inflationary episode provides more fertile ground than a slack one. That is the relevant context today: labor markets in the US and Europe have not fully normalized, and inflation expectations carry residual sensitivity from the 2021–2023 episode.

The wage-price spiral is typically the main inflation propagation mechanism that economists point to. But Benigno seems to argue that the supply chain disruption is automatic and primary. On its own, it’s powerful enough to generate inflation persistence that standard linear models miss.

What do the numbers say right now?

Benigno published his article in late April, when GSCPI numbers from March were available. At the time, the most recent GSCPI reading was 0.68 standard deviations, “elevated but not alarming by pandemic standards.”

He suggests that a reading as high as +1.5 or + 2.0 would “approach the historical threshold range associated with nonlinear dynamics.” April came in at 1.82 and May at 1.77, so it has risen to the level where a disproportionate inflation response may arise.

But this week’s CPI numbers were less worrying than they might have been:

Overall, the May CPI release suggested that inflation pressures remained elevated, but the underlying inflation impulse was, if anything, softer than the headline numbers alone imply. Headline CPI increased to 4.2% YoY, supported by higher gasoline prices and broader transportation-related costs as the Middle East energy shock continued to affect global oil markets. Core CPI edged up to 2.9% YoY from 2.8% in April on base effects, even as the monthly core pace eased to 0.2% (s.a.), with the remaining firmness concentrated in selected tariff-sensitive goods (notably apparel) and airline fares. Shelter and broader core services inflation remained well below their post-pandemic peaks and slowed further on the month, suggesting that the recent inflation impulse stayed concentrated in energy- and import-sensitive sectors rather than signaling a generalized reacceleration across the wider consumer basket.

I’ve just begun reading Anna Karenina, Leo Tolstoy’s 19th century novel about a married aristocrat who engages in an extramarital affair, leading to her social ruin and tragic end. A parallel story follows landowner Levin, who is searching for love and meaning.

This is part of my effort to better understand what makes for great literature and a great main character, as I think about living my life as literature, inspired by Nietzsche (interpreted by Nehamas).

I’m less than 10% through — I read it on a Kindle, so I see a record of progress. I’ve been surprised that the initial focus is not on Anna but on the character Levin, who apparently represents Tolstoy himself.

I’ve been as well thoroughly surprised by the misogyny and objectification of women that the book opens up with. The first character to be introduced, Stepan Arkdayich (Prince Oblonsky), has had an affair with his family’s former French governess, and he gives as his reason that his wife, in her thirties like he is, is too old and haggard for him.

Then Levin arrives in Moscow from the countryside, where he manages a large farm as a landowner, so as to make a proposal of marriage to a young woman, Kitty Scherbatsky. He seems to have no other interest in this young woman then that she is youthful and beautiful, and as well comes from a family he much admires for their affluence and cosmopolitan lifestyle. She’s like a piece of furniture to him.

I know that as the novel continues, Anna will be ostracized and punished by society for her affair but her lover will not. This is the double standard of adultery that reigned at the time and, in some ways, still holds sway.

So far, Tolstoy’s novel makes woman the “Other,” as described by Simone de Beauvoir in her classic 1949 feminist book The Second Sex. He even starts a book that is nominally about a woman — Anna — with tales of men (Oblonsky and Levin) talking about and objectifying women, first Stepan’s wife Dolly and then the object of Levin’s attention, Kitty (who is Dolly’s younger sister).

There is controversy over whether Tolstoy’s novel is a proto-feminist critique of differential societal rule-making applied to men and women. And, as the novel continues, I understand, Levin’s fantasy view of his now-wife as object only will be challenged.

So I’m going to continue reading it, and once I finish I think I will watch this 1977 BBC miniseries. Or maybe I’ll start watchinig it now, as I read!

Three elements I’m going to be looking out for as I continue to read (thank you Gemini for the guidance):

• Psychological realism – Tolstoy gets inside people’s minds and shows the messy way their thoughts flow
• Micro-gestures – Tolstoy uses tiny, subconscious physical details to tell what a character is really thinking and create subtle tension
• Moral ambiguity – Though many 19th-century Victorian novels present characters as clearly good or bad, Tolstoy refuses to color characters in black and white. This is similar to modern fiction.

A year of reinvention blogging

I’ve finished one year of the 1000-day project!

This is actually my second year of reinvention blogging, as I started with The Reinvention Project before realizing that 365 days is not enough to track the total personal transformation I’m seeking.

That gives me about one and three-quarters more years of this. I’ve already decided that, if I like, I will start an 11,000-day project after this, just so I have a container and approach for blogging every day. That will take me to almost ninety years old!

Over the weekend I began work on my magician’s trading plan that uses all resources at my disposal (emotional, financial, logical, creative) to effectively trade the market. The Magician card in the Tarot transforms ideas and abstractions into grounded reality, using objects representing all four suits of the Tarot (cups – emotions, pentacles – money, swords – logic, and wands – creativity).

I’ve been using a systematic approach to options trading with just one approach, the options wheel. The main options trade of the wheel is selling short puts, which provide a premium up front for taking on the obligation to sell a stock at a specific price, should the price of that stock be below the strike price of the option contract at the expiration.¹ By choosing stocks (and ETFs) that look like their prices will stay where they are or go up, and choosing strike prices far away from the current price, the options wheeler limits the risk of assignment. Sometimes the wheeler will get assigned, if there is bad news about that particular stock, or in a general downdraft in a sector or in the broad market. Then she starts selling calls against the stock — options contracts requiring the seller to sell her stock at a specific strike price by a specific expiration — to make premium, and to eventually have that stock “called away.”

The systematic approach I’ve used works in the following ways:

Emotional – cups

In the version of the wheel I’ve been doing you almost never close out a put just because it has lost a lot (which happens when the underlying stock price goes down below the strike price). You hold on, waiting for the stock price to recover, which it often does. If the stock price doesn’t recover, you might roll the option out in time — closing that contract and buying a new one with a further-out expiration date — if you can do so for a net credit, which keeps you from taking assignment on a stock at a loss. If you can’t roll for a credit, you wait and take assignment if you need to. This teaches emotional equanimity, and has taught me to ride stock ups and downs.

The options wheel also usually provides slow and steady income over time rather than big payoffs. It rewards patience and diligence.

Financial – pentacles

The options wheel is generally considered a way of generating income rather than growth of your account. Of course the lines between these two activities are blurred.

If you have a brokerage account with options access that allows you to sell puts either without anything backing them (naked puts) or with a money market fund or other investments backing them (can be considered cash-secured), you can earn yield or other returns on those assets even while garnering put selling premium. If you earn 10% a year from your options wheeling, then add to that whatever additional yield you’re getting from your money market fund — right now, around 3.5% — to get a total return on the portfolio of 13.5%.

Now all of this goes out the window if there is a big market decline that lasts a long time. The options wheel isn’t great for a bear market, though it can allow you to make money via bear market rallies.

Swords – logic

Some people say the options wheel is purely mechanical. If it were, then you could just write a software program to do it, and let it go, and make money without any human intelligence applied. Of course, that’s what algorithmic trading does, not just with the options wheel!

But practicing the options wheel as an individual usually involves the application of human judgement. You decide which tickers to wheel and how to diversify across sectors. You decide what your rules are for when to enter, when to roll, when to take profits, and when to close at a loss. If you get assigned, you decide on when to sell calls on the assigned stock, and at what expiration and strike price.

I’ve learned more about diversification, chart analysis, and stock selection in two months of doing the wheel than I ever did with seat-of-the-pants buy and hold investing.

Wands – creative

Here is where I want to expand. The wheel is too risky on its own in today’s volatile markets. I want to take the best of the wheel – how it helps me learn to manage my emotions while managing risk, how it gives me regular injections of joy when I close a position at a profit quickly, how it’s teaching me better diversification, how it tracks P&L by ticker and across the portfolio – and add flexibility, opportunity, and a better risk profile.

The outlines of the plan

Initially I’m planning to add vertical debit spreads as a second and third approach to making money with options. I say second and third because you can buy a vertical call debit spread, which is bullish, or a vertical put debit spread, which is bearish. I’m especially interested in outlining rules for buying bear put spreads, as they give me a way to profit from stock declines, whereas selling puts for the wheel is a neutral to bullish bet.

To increase discipline and continue increasing my emotional trading equanimity, I am going to use lookbacks at recent highs to decide when to enter a new bullish trade with breakdowns below the 50-day moving average to enter a new bearish trade. I’m going to use average true range (ATR) based stops as exit signals. I haven’t figure out exactly how these rules will work. I put together a spreadsheet with Gemini’s help and it came up with some entry and exit rules so easily. But of course these were rather thoughtless!

The key is not to create perfect rules and spend an endless time backtesting to see which ones are optimal, but rather to enforce a discipline onto when you enter and exit trades.

I need to improve my rules around diversification. Last Friday saw me overweight in precious metals, base metals, and mining, as well as in energy. I’ve found that investing off of convictions doesn’t really work. It’s momentum, trend following, and chart analysis for me from now on. And diversification across market sectors and factors (e.g., across industries, across geographies, across business size, and so forth).

Using all my resources

I’m “fortunate” that I still have carryover losses from 2022 and 2023 so for now I don’t pay any taxes on earnings from options trading (which generally generates short-term gains, but in certain cases can generate long-term).

I’m also fortunate, without quotes, in that I’m technically oriented and have experience building software. I’ve been putting together a prototype trading tracker in Google Sheets and plan to turn it into a database-backed web application once I figure out the details of what I want it to do. That will of course involve using some coding support AI like Claude Code or OpenAI’s Codex or Gemini. I’m hoping it won’t be prohibitively expensive by the time I get to that! I mainly need the AI to set up the system and code repo for me and once it’s all structured and ready to go the changes shouldn’t be too huge.

Finally, I also have plenty of understanding of options, if not actual experience trading different setups, from the past few years of experimentation and learning. Along with that, my ability to absorb complexities and my drive to do so serves me well as an options trader.

Next steps

Today I’m continuing to build out the new trading spreadsheet that includes a sheet for individual tickers that I’m following, a ledger of trades (all types of trades on one sheet, and open and closed on the same sheet), and a dashboard. The individual ticker page includes calculations of important metrics like the 200-day moving average and the ATR. I had already built a very full-featured spreadsheet for the options wheel but it’s not easy to expand it into more kinds of trades. This is really fun, but also pretty demanding cognitively!

Nice to see futures in the green this morning, of course on the back of another announcement by Trump saying a deal is imminent. That doesn’t help my energy positions, but the rest of the portfolio should look a lot better today compared to Friday.

1. Actually for most puts, the buyer of the option can exercised at any time not just at expiration. If the stock goes deep “in-the-money” before expiration, meaning the stock price is far below the put strike price, the put holder may elect to exercise early, thus requiring the put seller — the options wheeler — to buy the stock right then. ︎

Today is a week for making magic, ordinary kinds of magic, magic in hosting a graduation, magic in getting immersed in a great novel, magic in creating a trading plan for all seasons and markets.

Top priority magic: this Friday, my younger daughter graduates with her master’s of social work degree. We’re having a party at my house to celebrate, so I’ll be shopping, cleaning, fixing up the garden, and cooking in preparation. I used to love to entertain, but haven’t done it in a while, and I’m excited. I love the creativity of developing a menu and making my house beautiful; it is the practice of ordinary magic, queenly magic.

Slow reading Anna Karenina

Besides that, I’m continuing with my program of slow reading of novels, to create a foundation for approaching my own life as literature. I finished Iris Murdoch’s The Bell last week and started Anna Karenina yesterday. My Kindle estimates it will take me 15 hours to finish it, so it will likely be a multi-week reading, especially given the graduation commitments for this week.

Here are suggestions from ChatGPT, paraphrased, about what to watch for as I read AK:

1. Don’t ask “Who is right?” ask “How does each person make a life? Almost every major character is trying to answer the question “What makes a life feel meaningful from the inside?” As you read, notice what each character values, what they sacrifice, what they refuse to see, and whether their self-understanding matches reality.
2. Watch for self-deception. Ask “What story is this person telling themselves?” One of Tolstoy’s recurring insights is that people rarely lie most effectively to others. They lie most effectively to themselves.
3. Notice how attention works. Characters differ not only in what they believe but in what they notice. Ask “What occupies this person’s consciousness from day to day?” For Tolstoy, a life is partly made out of what receive’s one’s attention. This connects to Murdoch’s idea that moral life depends heavily on just and loving attention.
4. Compare Anna and Levin as rival artistic projects. Many readers notice that these two characters seem to inhabit different novels. Ask “what kind of beauty is each pursuing?” and “What kind of freedom?” You might think of them as conducting two different experiments in living. Ask “What does each character believe will finally make life complete?” then track whether fulfillment arrives when expected.
5. Examine the relation between authenticity and society. A modern reading often assumes that authenticity means resisting social conventions, but Tolstoy complicates this. Sometimes convention is deadening and sometimes convention preserves genuine goods. Ask “When does society corrupt people, and when does it protect them?”
6. Pay attention to ordinary happiness: farming, meals, conversations, work, family routines, small moments of satisfaction. Ask “What activities seem capable of sustaining a life over decades?” A Nehamas-style question might be “Which parts of life could be woven into a coherent personal style?”
7. Notice the gap between experience and explanation. Characters frequently experience something before they understand it [like real people!] Then later they construct explanations. Tolstoy often suggests that lived reality is richer than the theories we use to describe it [that’s one reason why it’s often better to express meaning through fiction than discourse]. Whenever a character reaches a grand conclusion, ask “Is this insight, rationalization, or both?”

Finally at the very end of Chat’s overly verbose response, it gave me a five question list to use, so I’ll include it here as a quick reference for myself to review before I sit down to read:

1. What does this person think will make life worth living?
2. What are they refusing to see?
3. What receives their attention day after day?
4. What kind of self is being produced by their choices?
5. Which moments in the novel actually feel alive, and why?

My goal is to turn the novel from a story about 19th-century Russia to an investigation of the raw materials from which any life is composed, in individual attempts to make life meaningful.

An overall trading plan, inspired by The Magician

Last week, I realized I need to plan my trading across all possible trading types, not just stick with the options wheel, which only works in neutral to bullish markets. I am using the Magician Tarot card as an archetype to guide me — I am developing my magical trading plan. On his table, the Magician has objects representing all four suits of the Tarot (pentacles – money and material resources, cups – emotions, swords – logic and words, and wands – ambition, creativity and passion). These suggest to me using all resources at my command including all trading types but also managing my trading with emotions (cups), my existing financial resources (my portfolio, my options and futures trading privileges, my margin availability, my tax situation), logic and analysis (swords), and, most important, my ambition and creativity (wands). An infinity sign above his head, to me, represents decisions and events reverberating into eternity. And the lush greenery and flowers surrounding him represent the analog of trading with gardening as well as suggesting the abundance that life (sometimes) gives.

The Magician, writes Rachel Pollack in Seventy-Eight Degrees of Wisdom, is a symbol of creative energy and manifestation:

Most modern images of the trump follow Waite’s wizard, raising a magic wand to bring into reality the spirit force – the energy of life in its most creative form. He holds the wand carefully, aware of that psychic power the Fool carried so lightly on his shoulder. Thus, the Magician, as the beginning of the Major Arcana proper, represents consciousness, action and creation. He symbolizes the idea of manifestation, that is making something real out of the possibilities in life.

And she continues:

We function best as a channel for energy. Unless we follow the path of the High Priestess in withdrawing from the world, we live our lives most fully when we create or are active. ‘Create’ does not mean simply art, but any activity that produces something real and valuable outside of ourselves.

While I continue to paint and I also spend time cultivating my garden, my main mode of creative channeling these days is through trading, not just the actual activity of trading, but the meta-activity of creating an overall approach and refining it.

The core of my approach is structure in the following stages, each with a sheet in my spreadsheet tracking the necessary data for that stage:

1. Watchlist: Watching tickers (stock or ETF symbols) and analyzing charts, to get an idea of the trend of a particular stock or ETF and what I think might happen next.
2. Trade Planning: Considering trades I might place based on an expected bullish, bearish, or neutral upcoming trend as well as how durable I expect such a trend to be. This consideration includes evaluation of what type of trade might make sense – sell a put, place a vertical credit or debit spread with puts or calls, buy a call or put, sell a covered call? Or simply go long or short a particular ticker?
3. Open Trades: Once a trade is decided upon, decide on when I might exit given a specific profit or loss, or is it a trade I will let run so long as the chart is going in the direction I expect? Setting up alerts and good-til-cancelled trades based on my planned exit points. Tracking profit and loss for these open trades as well as any signals that would indicate I need to exit, in absence of an automatic closure.
4. Closed Trades: Move data from the open trades sheet into closed trades. Record close date, realized P&L, time to closure, ROI and annualized ROI.
5. Ticker Tracking: Tracking P&L over time for each individual ticker. This allows me to both see which tickers are doing well or poorly over time and to make sure I achieve positive P&L for a specific ticker, if possible. This is not necessarily something that I feel is critical, but one trader I follow uses this as an emotional management tool.

The magic lies in taking abstruse, abstract ideas about the market and making them real in this world. With the options wheel, I have followed other people’s systems. Now my goal is to create my own magic, to make something real out of everything I’ve learned theoretically.

To use Pollack’s language, I need to open myself up to spirit and then drive that energy into reality:

Look at Waite’s picture of the Magician. He is not casting spells, or conjuring up demons. He simply stands with one hand raised to heavey and the other pointed to the green earth. He is a lightning rod. By opening himself up to the spirit he draws it down into himself, and then that downward hand, like a lightning rod buried in the ground, runs the energy into earth. Into reality.

The Magician directs his strength, and that’s what I need to do, by coming up with a more comprehensive trading plan. I’ve learned so much from trading the wheel in a systematic fashion. And I’ve learned so much by trading based on instincts (not successful!) Next is to expand so that I’m ready for any kind of market trends, so that I’m protected against large drawdowns, and so that I can succeed in different kinds of settings.

Pollack writes that the Magician means “will-power; the will unified and directed towards goals”:

It means having great strength because all your energy is channelled in a specific direction. People who seem always to get what they want in life are often people who simply know what they want and can direct their energy. The magician teaches us that both will-power and success derive from being conscious of the power available to everyone. Most people rarely act; instead they react, being knocked from one experience to the next. To act is to direct your strength, through the will, to the places where you want it to go.

This inspires me as I move forward with my new identity as a trader. I know what I want to do, and now I need to channel my energy in that direction. The next step in this evolution is to expand my trading powers and systems. To make some magic.

and some painting too

I find myself inspired to paint again by thinking about the irises that didn’t bloom this year. I’m imagining a fairly minimalist piece with colors of burgundy red, warm yellow, and light olive green as a background. I know that’s not the normal colors of irises, but it’s the colors of mine.

I have a 36″ x 36″ canvas I’m working with so, if this works, I will have produced a real showpiece.

Living life in the affirmative

Such a wonderful week coming up, but I imagine if the stock market continues to do poorly I will be feeling a bit woeful and self-pitying.

Here’s the question to keep in mind: How can the main protagonist of my life story (that is, me) show up in the most creative, curious, open, and affirming way she can? How can this week show an unfolding of her possibility, beyond where she’s been before? How can her emerging identity as a trader lead her to welcome big market pullbacks, as they create new opportunity?

How can I take what’s happening and make some magic?

Wishing a wonderful, magical week for all.